investment report part 2

8/10/2019 Investment Report Part 2

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Report on Investment in the Indonesian Food & Agriculture Sector

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A recent ACNielsen group survey1Whats Hot around the Globe Insights on Growth in Foodand Beverages 2004 highlights major international trends in a 59-country sample.

The global findings provide pointers to the future for Indonesia, as well as also reflectingcurrent behaviours in the Indonesian upper middle and high income sectors of themarket.

The headline messages reflect many realities in Indonesian consumer behaviour, adjusted forlocal market conditions. The key trends are:

a continued focus on health the need for convenience, and the growing impact of private label products (house brands).

ACNielsen has grouped food and beverages into 12 major categories commented that inglobal terms only meat, fish and eggs and non-alcoholic beverages had overall growth ratesabove the norm.

The non-alcoholic beverages category was the largest segment by both sales value andalso experienced the strongest absolute value growth.

Of the 89 categories reviewed, soy-based drinks experienced the fastest growth rate. Soy-baseddrinks are extremely popular in Indonesia.

TABLE 9:ACNIELSEN REVIEW OF FASTEST GROWING PRODUCT CATEGOTIRES,2004(selected items only)

CCAATTEEGGOORRYYCCAATTEEGGOORRYYGGRROOWWTTHH

RRAATTEE22000033--22000044Soy-based drinks 31%Eggs 16%Cereal/muesli/fruit bars 14%


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Some of the key trends of relevance to Indonesia include:

The emergence of healthy alternatives for a consumer base that is more

urbanised, sophisticated and aware of the need to improve dietary intake. In theCooking Basics category, two products that have experienced fast growth aresugar substitutes and cooking oils.

Trends in confectionery and snacks showed a move to healthier products and a

similar trend was observed in the beverages category. In beverages, health and energy drinks showed high growth with an emphasis on

sugar-free products as well as functional beverages containing amino acids,vitamins and supplements.

Continued strong moves towards bottled water were evident, triggered by concerns

for safe drinking water. Baby food showed a strong increase with baby formula registering the largest and

the fastest growth.

The beverages sector showed greater segmentation as companies develop

beverages to suit consumer preferences ranging from convenience to healthfactors.

The highest growth in the dairy sector was recorded by cheese, followed by

refrigerated milk products. Indonesias dairy products market remains small,although cheese is showing strong growth from a small base particularly in theyouth market which is increasingly attracted to convenience food.

ACNielsen summarises the global results as follows:

The message to manufacturers and retailers is clear. There is a definitiveneed to acknowledge and address the consumers requirement for healthyand convenient products. Consumers are willing to purchase both privatelabel and branded products, based on the value received. Finding healthyproducts that are both convenient and provide value is the true global

challenge.

TTHHEEIINNDDOONNEESSIIAANNCCOONNSSUUMMEERR22


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TABLE 10:ACNIELSEN MEDIA RESEARCH DEMOGRAPHIC SEGMENTS IN INDONESIA

SSEEGGMMEENNTT MMOONNTTHHLLYYHHOOUUSSEEHHOOLLDDEEXXPPEENNDDIITTUURREERUPIAH PER MONTH US DOLLARS PER

MONTH*

A1 Rp 2,250,000 and over US$244 and overA2 Rp 1,750,000 - 2,250,000 US$190 - 244

B Rp 1,250,000 1,750,000 US$135 - 190C1 Rp 800,000 1,250,000 US$87 - 135C2 Rp 600,000 800,000 US$65 - 87D Rp 400,000 600,000 US$44 - 65E Rp 400,000 and below Less than US$44

*EIU average annual exchange rate for 2004 of USD1 = approx. Rp 9,222

Jakarta continues to dominate national consumer market perspectives, particularly for products

targeting consumers with relatively more disposable income. This is clearly demonstrated inTable 11.

TABLE11:DISTRIBUTION OF CONSUMERS BY CITY AND EXPENDITURE SEGMENT,2004

A1 A2 B C1 C2 D E

Jakarta metro 18 14 20 28 11 6 3

Greater Jakarta 8 9 15 27 18 15 8Surabaya 16 11 19 24 14 13 3Medan 8 12 25 35 15 4 1Makasar 8 7 17 25 17 18 8Denpasar 14 12 19 26 16 10 3National 2004 8% 8% 15% 26% 19% 16% 8%

NATIONAL 2003 6% 6% 13% 24% 19% 21% 11%Source: ACNielsen, February 2005.

It is particularly pleasing to note, in comparison with figures for 2003, that there has been adegree of bracket jump as more consumers move into the higher expenditure segments.

N ti ll 32% fh h ld i th D d E t i 2003


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Following the release of a series of positive economic numbers in February 2005, Anton

Gunawan, Chief Economist at Citigroup3commented Real wages are positive and increasing,especially in the cities, and demand for items like motorcycles and electronics is increasing. Wedont expect private consumption to decrease in the near future. During 2004, Indonesian salesof passenger cars rose by 34% while motorcycle sales posted an impressive 38% gain over2003. Steady interest rates and ready availability of consumer credit has fuelled this growth. TheJanuary 2005 statistics showed a huge 50% increase in vehicle sales year-on-year.

Indonesian consumer sentiment is high. ACNielsens Asia Pacific Consumer Confidence study,released in December 2004, revealed that 76% of Indonesians surveyed are optimistic thateconomic conditions will improve over the next 12 months.

The return of consumer confidence and demand has, however, producedquite different consumer behaviours from those evident in the middle classboom period of 1992-1995. Consumers are more discerning in seekingvalue for money products, and this is particularly evident in the food sector.

The growth in consumer confidence in Indonesia is one of the highest in the Asia Pacific region,after China and India. The ACNielsen December 2004 survey reveals a number of interestingfindings but particularly reflects middle and upper segment consumer sentiments. The survey isconducted across a representative sample of 500 consumers, all with Internet access.

FIGURE 13:ACNIELSEN CONSUMER SENTIMENT SURVEYS 2002-2004

29

23

2827

19

19 19

25 2624 24

23 24

26

30

2527 27

28

32

3533

30

41

44

27

23

26

23

18

21 21

2822

19 20

1921

22 2224

27

23

20

2628

2423

3230

SARS&Iraq War

JWMarriottbombing

First Election

Second Election

Australian Embassybomb

ACNielsenACNielsen Consumer Sentiment SurveysConsumer Sentiment Surveys


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Terrorism (31%) down from 36% Crime (30%) down from 39%

Growth in Indonesias consumer demand in 2004 has been accompanied by a massive 42%increase in imports in 2004 for domestic consumption, with a more moderate 11.5% growth inexports. The recent increase in imports of capital goods and the improved export performancesuggest that Indonesia is now at a hinge point in the recovery cycle.

CCHHAANNGGIINNGGCCOONNSSUUMMEERRBBEEHHAAVVIIOOUURR

Considerations of Indonesian consumer behaviour, especially in the B and C categories, havebeen heavily conditioned by the events of the financial and monetary crisis of 1997/98(Krismon). The crisis had a major immediate impact but also left some indelible imprints onconsumer behaviour:

Consumers enjoyed higher levels of spending pre-Krismon, which allowed them to

buy higher quality, more nutritious food products.

The events of Krismon forced households to move to lower quality products, smaller

quantities and reduced consumption of protein sources such as chicken, fish andbeef.

Manufacturers responded to Krismon by producing better value for money offerings,

with many of these moving branded product to house or no-brand label, usually witha quality downgrade.

The need to constrain expenditure also resulted in consumers moving to smaller package sizes(already characteristic of the Indonesian consumer goods market) and Krismon drove this trendeven more strongly.

This phenomenon is frequently referred to as the sachet economy and Indonesia (along with

India and the Philippines) is one of the worlds major small pack markets. This type ofpackaging enables consumers to continue to enjoy their product of choice, but on a pay as yougo basis for a reduced quantity, rather than purchasing larger, more expensive pack sizes.

The sachet economy principle requires companies to create profitable business

models based on a huge number of small transactions.


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Other local Indonesian companies, such as PT Wings are challenging Unilevers

range of global household and personal care products with ranges of speciallyformulated local brands, pitched specifically to the Indonesian consumer.

ACNielsens index of consumer purchase (prices) has shown a strong increase in 2004,compared with 2003.

FIGURE 14:

134%

131%

123%122%

112%

165%

111%

80%

90%

100%

110%

120%

130%

140%

Nov/Dec

01

May/Jun

02

Nov/Dec

02

May/Jun

03

Nov/Dec

03

May/Jun

04

Nov/Dec

04

80%

90%

100%

110%

120%

130%

140%

150%

160%

170%

ACNielsenACNielsen Consumer Purchase IndexConsumer Purchase Index -- FoodFood

(base is average purchase value in 2001)(base is average purchase value in 2001)

Source: ACNielsen Retail Index

The survey is based on the top 30fast moving food items including: powdered milk noodles cooking oil and riceand covers 4000 traditional stores,and 1500 modern outlets.

The ACNielsen survey covers95% of Indonesias populationcentres.

Growth in the purchase price index in the modern trade sector (supermarkets, hypermarkets,

convenience stores) was up 43% on the previous year while the increase in the index fortraditional outlets (wet market and similar) was 19%, producing a Total Indonesia figure of25.7% growth. This compares with the 2003 figure of 14.1%. The official consumer price indexyear-on-year to January 2005 was 7.3%

RREETTAAIILLBBEEHHAAVVIIOOUURR55

The trends outlined by Instate in the Food Exporters Guide to Indonesia are still in evidence,and include:

Hypermarkets, mini markets and warehouse stores are taking some of the growth

from the modern sector that used to be captured almost exclusively by


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Increasing dominance of hypermarkets in the modern sector, notably Carrefour.

The planned 100% acquisition of the PT Hero supermarket chain by Dairyfarm, a

Jardine Matheson company. (This is currently being contested in the Indonesiancourts).

Continuing rationalisation of the supermarket sector, where, according to ?, only

the strong will survive. If PT Hero moves to a 100% foreign-owned entity it isexpected to consolidate its market position, and in association with the groupsGiant hypermarket outlets (now 6 sites) substantially grow its market share.

Strong performance in the premium sector by specialty outlets catering for the A1

market, including the Papaya and Ranch Market groups, and boutique gourmetoperations, such as Epicure Fine Food Distribution.

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Indonesia produces a wide variety of fruit and vegetables, with emphasis on tropical fruits suchas papaya, pineapple, rambutan, bananas, mangoes, avocados, jackfruit, melons and durian.Major vegetables produced include cabbage, tomatoes, cucumber, shallots, mustard greens,

leeks, carrots, radish, potatoes, onion, beans and chili.

FIGURE 15:INDONESIA S MAJOR FRUIT AND VEGETABLE CROPS,CALENDAR YEAR 2003

IndonesiaIndonesia s Major Fruit Cropss Major Fruit Crops-- Production in CY 2003Production in CY 2003

000 metric tonnesSource: FAOStat Database0 1000 2000 3000 4000 5000

Avocado

Papaya

Pineapple

Mango

Oranges

Bananas

000 metric tonnesSource: FAOStat Database

IndonesiaIndonesias Major Vegetable Cropss Major Vegetable Crops

Production in CY 2003Production in CY 2003

0 200 400 600 800 1000 1200 1400 1600

Cabbage

Potatoes

Beans

Chil i

Cucumber

Tomatoes

Carrots


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An analysis of Susenas data from 2003 onwards, however, does not indicate the same strong

growth trend as registered during the 1999-2002 period. Consumption growth in urban areas ispredictably higher than in the rural population. The survey does not, however, include crops fromhousehold gardens which obviously are very important sources of fruit and vegetables in ruralareas.

Nevertheless, household expenditure on both items increased by over 12% year-on-year,double the per capita expenditure on all food items.

TABLE 12:INDONESIAN HOUSEHOLD CONSUMPTION DATA,2003

IINNDDOONNEESSIIAANNHHOOUUSSEEHHOOLLDDCCOONNSSUUMMPPTTIIOONNDDAATTAA

22000033Changes in average per capita consumption over 2002

Urban TOTALFruit 14.1% 13.5%Vegetables 11.5% 10%FRUIT&VEGETABLESTOTAL 12.8% 12.2%

ALL FOOD ITEMS 7.8% 6.0%Source: BPS Household Expenditure Survey 2003

An analysis of poor households during the 1999-2002 period indicated that by shiftingexpenditure towards rice from other foods, the poor appear to have maintained their caloricintake levels with a modest improvement in the quality of their diet.

FIGURE 16:FOREIGN INVESTMENTAPPROVALS IN INDONESIANAGRIFOOD

0 5 10 15 20 25 30

Others

Noodles

Confectionery

Dairy

Fruit & Veg

Meat

Beverages

Bakery

Proc Foods

Palm Oil

Fisheries

Foreign Investment Approvals inForeign Investment Approvals in

the Indonesian Agribusiness Sectorthe Indonesian Agribusiness Sector

(CY 2003 and 2004 combined)

A review of investmentapprovals issued byIndonesias InvestmentCoordinating Board (BKPM) forthe 2 calendar years 2003 and2004, however, indicates littlenew investment in the fruit andvegetable sector. The onlyforeign investments listed werefor two small investments formushrooms (champignons) andone for canned fruit and

t bl l d t US$42


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There have been a number of efforts at larger scale production in Java and other islands,

including potatoes as well as a leafy green vegetable project in the Riau islands, funded by theSingapore Economic Development to supply the Singapore market. After about 10 years of theproject life, the venture is reported to be operating relatively well.

While there is a clear incentive for farmers to move to higher value horticulture from lower valuecrops, expansion in this sector has been slow and much of Indonesias demand has been metby increased imports.

There are many reasons for the low level of commercial interest in the fruit and vegetable sector.Higher market prices for horticultural produce are generally an attraction for farmers to switchfrom lower value crops such as cassava, tapioca and also rice. Indonesian Government policiesthat stress the importance of self-sufficiency, however, have tended to concentrate supportprograms on the production of lower value staple commodities.

As noted earlier, the development of the horticultural industry in China has taken a different tack

in developing strong export markets in higher value fruit and vegetables, while importing anincreasing proportion of its lower value grain requirements. Chinese farmers are now having amajor impact in global and regional South East Asia markets for their horticultural produce.Chinese traders, however, still position themselves at the volume end of the market, exportinglower value apples, and continuing to import higher value, better quality product.8

A seed potato project has been undertaken by the WA Department of Agriculture and its EastJava counterpart. Western Australia has supplied potato seeds to farmers in East Java. This has

been supported by a program to assist Indonesian farmers to improve both the quality andquantity of their yields. Both agricultural scientists and Western Australian farmers have beencoopted to provide on the ground expertise. There are other projects, such as strawberryproduction in the Java uplands, that are proceeding, but these have been on a relatively limitedscale.

FFRRUUIITT

FIGURE 17:

Major Fruit Producing ProvincesMajor Fruit Producing Provincesin Indonesia.in Indonesia.

Others

NorthSum

atra

SouthSum

atra

Lampung(Includes mangoes, oranges,papaya, bananas, and pineapple.)

Java is the major centre of fruit production inIndonesia. Fruit and fruit juice consumption hasshown strong growth throughout Asia, includingIndonesia.


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The Subsistence to Supermarket II publication - Agrifood Globalisation and Asia Volume III9provides a great deal of valuable data on demand trends including modelling results for demand

of key food items to 2010. It notes (p. 382) that fruit remains a luxury item of expenditure up to arelatively high income level.

Bananas, jambu (water apples) and mangoes are the most popular fruits consumed,with bananas accounting for approximately 40% of total fruit consumption. The reportnotes that Indonesian fruit consumption declined in the 1980s but rebounded in the1990s as market liberalisation measures took hold, notably for imports. Per capitademand for fruit is projected to rise more slowly between 1997 and 2010 than during the1990-1997 period, with an annual growth rate of 1.5% - which is still well-below tropicalfruit consumption in other large South East Asian countries.

TTRROOPPIICCAALLFFRRUUIITTIndonesia is a major producer of tropical fruit. Key crops include bananas, mangoes, papaya,pineapple and avocado. Their relative volumes are shown in this pie chart.FIGURE 18:

Indonesian Tropical Fruit ProductionIndonesian Tropical Fruit Production -- 20042004

Source: FAOStat

Banana

Tropica

lFruitNE

S

PineappleMango

Papaya

Avocado

MMaajjoorrGGrroowwiinnggAArreeaass::

Bananas: Java (about 70%), SouthSumatra, South Sulawesi, NTT.

Pineapples: Java (about 50%),South Sumatra, Riau.

Mango: Java (about 70%), SouthSulawesi, NTT.

Papaya: Java (about 60%), NTT,South Sulawesi, South Sumatra.

AAPPPPLLEESS

FIGURE 19:

50

60

70

Indonesian Imports of Apples 1999Indonesian Imports of Apples 1999--20032003 Value US$ millionsValue US$ millions

US$61.8m

US$68.3m

US$4US$42.4m

Apples are a popular deciduous fruit inIndonesia. The fruit remains a luxury itemwith import consumption shown in theadjacent graph. China is estimated to nowsupply60%of importdemandand theUSA


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TABLE 13:

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OOPPPPOORRTTUUNNIITTYY MMAARRKKEETTSSEETTTTIINNGGSS&& TTRREENNDDSS CCOOMMMMEENNTTAARRYY

Tropical fruit production and

processing

Ensuring a consistent supply of

raw material is a challenge and

many ventures have failed

because of irregular supply of

varying quality. Prospects

nevertheless are good, notably for

export, providing (most importantly)

that sound supply relationships can

be negotiated with the local

farming community.

Pineapple processing has been

undertaken and has reasonable

prospects. Mangoes represent good

potential if supply chain and

handling arrangements can be

improved.

Vegetable processing Many ventures are succeeding, but

usually on a limited scale. Several

potato projects have been

undertaken, but with limited

success.

Potatoes represent an opportunity if

associated factors can be resolved.

Demand for the end product is good

but growing, handling and

processing issues still need close

attention.

Intensive vegetable processing Good prospects exist for

production of french beans,

chillies, and other intensive crops

which can be grown on small land

holdings.

Many good operations exist but with

limited production capacity. Success

is highly dependent on supply

agreements with farmer groups.


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DDAAIIRRYYPPRROODDUUCCTTSS

Indonesian Dairy Industry Snapshot

MAJOR PRODUCTS Powdered milk, sweetened condensed milk, UHT milk, cheese,yoghurt, ready to drink milk.

TOTAL CONSUMPTION 1.3-1.4 million tonnes milk equivalent

PER CAPITACONSUMPTION

6-7 litres p.a.

MAJOR PLAYERS Nestl , Friesche Vlag, Ultrajaya, Indomilk, Nutricia, Greenfields

TRENDS Market growing at 12% p.a. with good prospects as dairy productsincreasingly form part of the Indonesian diet. High skim milk powder

(SMP) prices may moderate growth.IMPORTS Imports account for about 70% of consumption, which is forecast to

increase at a higher rate than local production.

The consumption of milk and dairy products in Asia has generally been at a much lower levelthan in Western societies. Most Asian countries, with the exception of the Indian subcontinent,do not have a strong culture of milk and dairy product consumption.

Since the 1960s, however, there has nevertheless been a very rapid growth in milkrecombination plants throughout Asia, and many very large operations are in evidencetoday. Recombining technology underpins the import dependence of many Asiancountries for milk and dairy products, and has extended from a tradition of ambient shelfstable products into fresh chilled milk and related beverages.

70% of Indonesian milk product consumption is based on imported milk powder.12

Australia and New Zealand account for 60-70% of Indonesias milk product imports.

Indonesia remains one of the few dairy markets in the world that is dominated by powdered milk,which represents more than 50% of market consumption.13This is very much a function of thearchipelagic geography of the country which makes transport difficult, as well as the low per


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Friesche Vlag (Netherlands) Nutricia (Netherlands) baby formula

PT Indomilk established in 1967 by the Australian Dairy Corporation, now owned

by the Salim group PT Ultrajaya.

A more recent entrant to the market is Australias AustAsia Exports, which established a dairyoperation, PT Greenfields, at Malang in East Java. This operation now has 2,500 cows and aprocessing plant producing fresh milk and UHT milk. It is the largest dairy operation in Indonesiaoperated by a corporation.

CCAASSEESSTTUUDDYYPPTTGGRREEEENNFFIIEELLDDSSThe PT Greenfields dairy is a vertically integrated operation with a two and a half thousandhead lot-fed dairy herd, a state of the art milking parlour and a processing and p-ackaging plant.

AustAsia's Edgar Collins says taking a fresh and committed approach has been a large factor inthe company's success. The consortium that is behind this project is one of Indonesias largestchicken producers and stockfeed manufacturers, as well as the biggest importer of live beef

cattle from Australia. More Indonesian consumers now have refrigeration and I think as thatcontinues to grow the market will expand and the acceptance of products like fresh milk willbecome a bigger part of Indonesian life.

The dairy has been built halfway up an extinct volcano in East Java in climatic conditionssimilar to the Atherton Tablelands in North Queensland. The temperate conditions mean cattlehave been sourced from all over Australia. Their feed ration consists of locally grown grasses,corn, kapok, coconut as well as coffee skins and by-products from a local brewery. A lot of thefeed ration is prepared at AustAsia's feed mill in Sumatra, which also services cattle rations for

the live beef trade and the companys feedlots. 200 people are employed running the dairy, andthe milk-processing factory. Mr Collins says what sets the operation apart is that the 30 tonnesof milk produced per day is processed on site.

As people become better educated they appreciate that milk is one component which is a goodnutritional base for children. Additionally, milk is one of the 10 food products that thegovernment considers strategic. Milk is promoted by the government and they give us strongsupport, he said. What milk doesnt go into fresh milk, goes into UHT. The one-litre cartons ofUHT full cream milk have a one-month shelf life, enabling the product to be distributed around

Indonesia and exported to Singapore and Hong Kong.

We have a lot of confidence in the future of the Indonesian market and consider dairy productsa strong growth area for domestic production and export to Asia. Fresh milk is a growing marketand we have developed a distribution network to ensure the product arrives in top condition.Collins noted that a vertically integrated operation was a strong factor in PT Greenfieldssuccess. Applying proven Australian technology and production techniques throughout the


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BBEEVVEERRAAGGEESS

The Indonesian beverage sector has experienced rapid change in recent years. There has beenrobust growth in bottled water sales. (principally in 5 gallon or 20 litre containers). Municipalwater authorities have found it difficult to keep pace with demand for safe drinking water andfunding for new water supply infrastructure has been insufficient for existing needs.Groundwater, especially in Jakarta, has long been a major source of supply for manyhouseholds, but this is declining and in some areas salinity and contamination are ofincreasing concern.

The carbonated beverages sector has been relatively static, due largely to the effects of thefinancial crisis and higher unit cost of drinks as a result of the imposition of luxury tax (10%). Theindustry lobbied intensively for relief from this tax and it was removed in January 2005. The taxwas also removed at the same time from fruit juices, which are experiencing high growth.

Processed, ready to drink (RTD) beverages include carbonated drinks, fruit juices, tea

and coffee, cordials (dilutables), drink powders, fruit-flavoured drinks and more recententrants such as energy drinks and sports (isotonic) beverages. The table indicates salestrends over the last 3 years for the major products in the RTD category.

Soft drinks experienced another year of growth, registering almost 13% growth to reach over 10billion litres of volume sales in 2003. Although the growth was a slowdown from about 25% in2002, this does not indicate a more difficult year for soft drinks. The slower growth is rather theresult of stabilisation within the bottled water market that experienced boom years in 2000-01.

While RTD coffee and sport drinks markets experienced very strong growth, this needs to beplaced in the context of the very small consumer base for these particular products. Bottledwater continues to extend its market penetration, whilst carbonated beverages experiencerelatively less growth.

There are three companies dominating the soft drinks market:

PT Aqua Golden Mississippi (Danone) Coca-Cola PT Sinar Sosro.

PT Aqua Golden Mississippi is now a subsidiary of the Danone Groupe of France. Coca Cola


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income groups and are very competitively priced. They are positioned at a price point just a littleabove the smaller packaged bottled water. Orange flavour is especially popular with Indonesian

consumers, and was invariably chosen by most companies to launch their flavour ranges. 17

The energy drinks sector is another area of high growth, with Red Bull the market leader,dominating the A market segment. A local brand, Extra Joss is challenging Red Bulls positionin the medium/mass market, aided by strong promotion and an extensive distribution network.Extra Joss sales grew by 17.3% year-on-year in 2003, much lower than its 5-year compoundannual growth rate of 64.8% - as many new players are entering this market segment. On salesfigures to the third quarter of 2004, Extra Joss is tracking at an annualised growth rate of

14.6%.

There is continuing potential for growth in soft drinks, especially considering that per capitaconsumption in 2003 was still low at 46 litres/year. Higher volume sales for soft drinks are stillinhibited by the low disposable incomes of the majority of Indonesians.

Given the expectation that the economy will continue to recover, soft drinks are expected to

continue their strong growth path and for the period 2003-06, industry forecasts are for anannual 11% growth rate.18

A combination of high growth and ready consumer acceptance ofnew brands offering nutritional benefits has produced strong nichemarket opportunities, particularly for functional beverages such asflavoured waters, energy and health drinks.


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Indonesian Bottled Water Snapshot

MAJOR PRODUCTS Bottled water in 5 gallon (20 litre) bottles as well as individual

consumer packs. 80% 0f sales are in 5 gallon packs.

TOTAL CONSUMPTION 7,400 - 7,600 million litres

PER CAPITA

CONSUMPTION

35 litres p.a.

MAJOR PLAYERS PT Aqua (Danone), Nestl /Coca Cola Indonesia and 350 localcompanies.

TRENDS Market has been growing at 22% p.a. compound with soundprospects as upgrading water infrastructure is expected to take over10 years.

ISSUES High purity spring sources will become scarcer and production

techniques may shift to treating alternative water sources.

Heightened consumer concern with the potability of both reticulated and ground water has beenbehind the extraordinary growth in bottled water sales in Indonesia. Indonesia is now the worlds8th largest consumer of bottled water, in rankings issued by the International Bottled WaterAssociation for 2003.19

Indonesian bottled water consumption grew at a compound annual growth rateof 22% between 1998 and 2003, second only to China (24.6%).

The Indonesian bottled water market is dominated by PT Aqua, a company that is now ownedby Danone of France. PT Aqua is estimated to hold 80% of the Indonesian market, followed bythe Adesbrand jointly marketed by Nestl and CCI (Coca Cola Indonesia). Nestl Waters,which is global leader in terms of bottled water (having 17% of the world market and annual

sales turnover of more than US$6 billion) holds a 65% stake in PT Ades Alfindo Putrasetia.

Generally water for bottling purposes is sourced from natural springs and then filteredand sterilised with ozone treatment. There are over 300 local suppliers of bottled waterin Indonesia, as well as 1,500 filling stations that fill consumer packs from bulksupplies


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TABLE 15:

IndonesianBeverageConsumption Volume million litres

Share of total nationalRTD market

GrowthPercent

ValueUSD million

GrowthVolume2003 to2004

2002 2003 2004 2002 2003 2004 2002 2003 2004 2003 2004 PERCENT

RTD WATER* 6,355 7,041 7,661 78% 79% 79% 31% 11% 9% 660 700 9%

DILUTABLES 21 22 24 6% 6% 6% 10% 7% 8% 120 130 8%

CARBONATED 22 19 19 6% 5% 4% -10% -15% 0% 380 360 0%

RTD TEA 15 16 17 4% 4% 4% 5% 7% 2% 210 200 2%

RTD MILK 9.6 10.6 12 3% 3% 3% 15% 11% 15% 230 250 15%

ENERGY DRINKS 8.5 9.6 10.6 2% 2% 3% 22% 13% 12% 310 340 12%

RTD JUICE 1.6 1.9 2.3 0% 1% 1% 21% 20% 18% 50 60 18%

RTD FRUIT

FLAVOURED1.2 2.3 2.7 0% 1% 1% 36% 89% 19% 30 30 19%

ISOTONICS 0.4 0.4 0.6 0% 0% 0% 29% 30% 30% 10 20 30%

RTD COFFEE 0.2 0.2 0.2 0% 0% 0% 110% 12% 26% 10 10 26%

TOTAL NARTD* 355.5 378.4 420.4 100% 100% 100% 24% 9% 8% 2,010 2,100 8%

Source: Association of Beverage Industries, Indonesia (ASRIM) *Includes home and office

* Non alcoholic ready to drink


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Table 16

IINNVVEESSTTMMEENNTTOOPPPPOORRTTUUNNIITTIIEESS--BBEEVVEERRAAGGEESSOPPORTUNITY MARKET SETTINGS &TRENDS COMMENTARY

Introduce new technology

for bott led water

production.

A strong market with sound

growth prospects but with well-

established MNC competitors.

Collaboration with a strong

regional producer a possibility.

Demand is likely to outstrip

supply as competition for natural

spring water exceeds availability

and environmental factors impact

on spring water sources.

New fruit blends based

on strong brand

promotion.

Demand is growing but the

market is highly price-sensitive.

Upper end market is quality

conscious, with opportunities for

brand development.

This category is expected to

undergo fast growth but

challenge will be to tap the

middle/low market sectors with

competitive offerings.

Health drinks fortified

juices and blends.

High-end consumers are

responsive to functional

beverages. Volumes low but

growth prospects are promising.

Good local companies would be

attracted to producing and

supporting a branded product

with a track record in Australia or

other markets.

Energy drinks Red Bull (premium) and Extra

Joss (mass market) have

entrenched positions, but this is

a fickle market where brands

with innovative consumer

propositions can capture market

share.

These products require high

promotional support, in media

and local point of sale promotion.

Specialty frui t

concentrates and premix

Some potential at high end of

market.

Low volume for premium market.


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MMEEAATT

Indonesian meat consumption is low. The USDA projects per capita consumption ofmeat in Indonesia to range between 10 and 13kg through to 2010. 20The Washington-based International Food Policy Research Institute (IFPRI)modelling conducted for theDFAT publication Subsistence to Supermarkets Vol III, however, suggests that while stilllow in world terms, consumption by 2010 could be 12-17kg per capita.

The major meat groups are:

poultry beef and buffalo meat, and goat meat.

Pork is also produced in the Riau Islands for export to Singapore, but as Indonesia is aMuslim country, pork consumption, especially in the populous Western part of thearchipelago, is negligible.

PPOOUULLTTRRYY

Indonesian Poultry SnapshotMajor products

Day old chicks (DOC), broilers, chicken cuts, processedchicken products, eggs.

Total consumption 800,000 mt p.a.Per capitaconsumption

3.2 kg p.a. (broiler) 4kg p.a. (native chicken + broiler)

Major playersPT Charoen Pokhpand, PT Japfa Comfeed, PT Sierad

Trends

Chicken is the cheapest source of protein and potential toincrease production is sound. Processed chicken productssuch as nuggets have excellent market acceptance and highgrowth.

IAvian fluhasdampeneddemandbut isnot expected tohave


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Feed is the critical input for the industry and feed cost and availability is vital for the

industrys development. Industry sources25

indicate in broad terms that:

feed represents 70% of the price of chicken 50% of the feed price is corn 40-50% of the corn used is imported

Poultry processors contacted reported strong demand for chicken-based products suchas nuggets, chicken balls and other minced chicken products as well as processed

chicken parts such as wings.

COMPANY PROFILE:PTSASTRA ,MEDAN

PT Sastra was established in 1993 by Ir Sastrawan, who has extensiveexperience in the poultry and feedmilling industries. The Sastra operation isan intensive breeder facility producing 6 million day-old-chicks (DOC)annually. The company markets DOCs in North and West Sumatra and Riauprovinces. There is no modern chicken slaughterhouse facility in NorthSumatra and Ir Sastrawan is keen to attract an investor for both a slaughterfacility as well as a feedmilling operation. Based on current consumption, webelieve there is demand for processing 100,000 birds per day. This iscurrently being processed through traditional markets, with large variations inquality and distribution.

Ir. Sastrawan continued, The area needs a modern slaughtering facility and Ibelieve the economics are sound. The provincial government and the City ofMedan are supportive of the project. Along with other local companies, we

welcome involvement by Australian companies who wish to become engagedin a solid industry in a major regional market in Indonesia. They will receive awarm welcome

The International Finance Corporation (IFC), the private sector development arm of theWorld Bank Group, is working on a poultry and maize development program in South

Sulawesi, one of Indonesias high potential agricultural development areas. IFC assistslocal groups through PENSA (Programme for Eastern Indonesia Small-MediumEnterprises Assistance). The Australian Government supports PENSA through AusAID,as do the governments of Canada, Japan, Switzerland and the Netherlands.

Maize is an essential ingredient for the development of a competitive poultry


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Comfeed group, one of Indonesias largest integrated poultry producers,operates a feed mill in Makassar.

IFC has produced an excellent document26outlining the scope of the poultry and maizeindustry in South Sulawesi, along with a business plan for the industry.

BBEEEEFF

Indonesian Beef SnapshotMajor products Prime cuts, processed beef, meat balls (bakso balls), fast

food

Total consumption 420,000 mt p.a. of beef and buffalo meat.Per capitaconsumption

2.3 2.5 kg p.a. of both beef and buffalo meat.

MAJOR PLAYERS Santori (AustAsia/Japfa group), Torohasindo (Buntoro)Consolidated Pastoral Holdings, Great GiantTRENDS Beef has re-established its pre-crisis volumes and 2005

should be a good year for the industry. Indonesia is an Asianmarket with a very strong preference for beef. Low per capitaincomes in Indonesia have severely limited marketdevelopment. As income levels rise, however, beef willbecome the meat of preference for many Indonesians,

although poultry will continue for the foreseeable future asthe primary meat source because of its relative affordability.

Processed beef products such as sausages and meatballsand blended beef mince mixtures (e.g. the popular local dishof bakso balls) have shown steady growth, which is expectedto continue.

ISSUES Linkages to the feed supply chain are increasingly critical forsuccess and the more highly-integrated companies willprosper.


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Australia remains the major source of live cattle for Indonesia, with exportsfrom Australia of about 360,000 head in 2004.

The economic crisis of 1997/98 had a crippling impact on the Indonesian beef industry.Many feedlot and partnership operations collapsed and the domestic breeder herddecreased with the high rupiah price for beef. Beef processing also became moredifficult to sustain, as throughput dropped and unit costs of slaughtering soared.

The beef industry has recovered since 1999, and 2004 was reported to be agood year for the industry as growth returned. Smallholder production still

accounts for over 80% of beef production, but the expansion prospects of thissector are seriously constrained by low breeding herd productivity and a scarcityof readily available forage in particular regions. The structure of beef salesdiffers between outlets. Wet markets dominate sales of beef, but supermarketssell most imported beef and beef from imported cattle.

The major feedlot companies have their operations in South Sumatra (Lampung) withabattoirs in Jakarta. These are:

Santori (AustAsia/Japfa group) Australian interest Torohasindo (Buntoro) Consolidated Pastoral Holdings Australian interest Great Giant.

Livestock imports include purebred cattle for breeding and feeder cattle for fattening.

Imports of feeder cattle rose rapidly until 1997 then dropped to almost nothing during theheight of the financial crisis.

Beef continues to be a consumption item for the middle to upper classconsumer, with poultry and fish being lower-priced protein sources.

A number of Australian livestock companies have some form of investment inIndonesian feedlots or meat processing and they include AustAsia Export Services,Consolidated Pastoral Holdings, the Heytesbury Group and Australian AgriculturalCompany.

The fortunes of the industry generally follow the health of the Indonesian economy, withconsumers moving to beef as soon as they have sufficient disposable income. Other


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BBAAKKEERRYYPPRROODDUUCCTTSS

Indonesian Bakery SnapshotMAJOR PRODUCTS Instant noodles (and some fresh noodles, biscuits, bread,

pastries, cakes, pasta.

TOTAL CONSUMPTION N/A

PER CAPITACONSUMPTION

N/A

MAJOR PLAYERS Indofood, Mayora Indah, Sari Roti, Khong Guan, Wings andmany others.

TRENDS Instant noodle sales are continuing to grow well and bakerylines are also enjoying good growth as the economyimproves.

ISSUES Apart from instant noodles and biscuits, most bakery linesare consumed by the upper middle to high end consumer.Cereal-based products which can compete in the lower endconsumer bracket also have good prospects.

Indonesias bakery sector is large and growing. The production of flour is dominated by

the Bogasari Group, which operates two of the worlds largest flour mills one inJakarta (10,000mt per day capacity) and Surabaya (5,900 mt per day capacity).Bogasari is controlled by the Indofood Group of companies, Indonesias largest foodconglomerate, which is owned by the Salim Group, through First Pacific Company ofHong Kong. Indofood and its subsidiaries have sales of over US$2 billion per year.

Australia is a major and traditional supplier of wheat to Indonesia, with a market

share of about 60%.

Bogasari controls 70% of the Indonesian flour market, with three other mills accountingfor 20 percent of the market. The remaining 10 percent of the Indonesian flour market(about 300,000mt) is supplied by imported flour, with Australian flour comprising overhalfof these imports



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vegetables and spices. Additionally, instant noodles are easy to store and transport.Many instant noodle varieties are flavoured with a variety of ingredients.

Instant noodles have a high market penetration, with distribution at street corner level inany Indonesian city or small village.

Indofoods noodle brands Indomie and Supermie are market leaders inIndonesia with several other brands (Wings in particular) also recording strongsales as this market category continues to record double digit growth. Industry

sources put current annual sales growth at around 10% p.a..

Bakeries have become a common sight in Indonesia, with many outlets producing arange of breads but also pastries and cakes. There is an estimated 10,000 bakeries inIndonesia, many of them small mom and pop operations, but there are also many topclass bakeries producing for the middle and upper consumer segment.

On the fast food front, pizza restaurants are now common, again catering to the middleand upper end consumer. There are now more than 100 Pizza Hut restaurants in morethan 20 Indonesian cities. According to Pizza Hut Indonesia President Director, MrStephen McCarthy, company sales have been experiencing 20% growth over the lastfour years.29

In the top class malls, also several bread-based franchises have become highly popular,notably Bread Talk a Singapore franchise which bakes on site in modern malls and

produces an innovative range of bread-based snacks. While consumers of these linesare again in the upper middle to high end category, the popularity of these outlets doesindicate the acceptance of bread-based products to Indonesian taste and Bread Talkhas cleverly blended a bread based product with a range of ingredients to appeal tolocal tastes, including cheese and fruits.

In addition to individually owned local bakeries, larger food processorsmanufacture bread for distribution at supermarkets and local stores such asmini-markets.

Biscuits are a common element in Indonesian diets, with several major localmanufacturers including Arnotts from Australia. Offerings range from high-end biscuittypes to standard digestive biscuits, which are a common snack item throughout



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In terms of recent Australian investment, the CBH Group of Western Australia

announced a A$72 million investment in Asian flour milling in association with itsjoint venture with the Salim Group, Pacific Agrifoods in late 2004. Theseinvestments will provide CBH with a significant position in flour milling and grainhandling in Indonesia, as well as in Malaysia and Vietnam.

COMPANY PROFILEPTINDOFOOD SUKSES MAKMUR TBK PT Indofood Sukses Makmur is one of the world's largest producers of instant

noodles and, through PT Bogasari, the one of the largest flour millers in theworld. Indofood operates one of the most extensive distribution networks inIndonesia. The company also manufactures infant cereals, sauces,seasonings, flour, branded edible oils, snack foods and margarine.

Indofood is a publicly traded company, and its major shareholder holder is theFirst Pacific investment group of Hong Kong. Indofood s products aredistributed mainly through its subsidiaries that deliver the companys productsto more than 150,000 retail outlets in the country. The Indofood group

employs over 40,000 staff.

Indofood is a major buyer of Australian wheat for its noodles and bakeryoperations. The companys divisions are always seeking new productopportunities and welcome approaches from Australian firms with foodproduct propositions that complement their current activities, includingvegetables, health foods and dairy products.

TABLE

18:IINNVVEESSTTMMEENNTTOOPPPPOORRTTUUNNIITTIIEESSBBAAKKEERRYYPPRROODDUUCCTTSS

OPPORTUNITY MARKET SETTINGS &TRENDS COMMENTARY

Bakery ingredients Market is experiencing solid

growth and is well-supplied at

both the premium and the price-

sensitive end.

Potential exists for working with

existing suppliers to produce

speciality lines such as fruit and

nut-based fillings, flavours and

additives.

Bakery operation A crowded market with many

competitors.

Fine profit margins, except for

specialty outlets.



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Biscuits A steady market with well-

established players, but usuallyoffering standard and

unexciting products.

As a more recent entrant,

Arnotts have demonstrated thatthe market responds well to new

products.

Cereals A profusion of brands, but an

upper medium/high segment

product.

Some niche opportunities as

healthy brands start to make

inroads.

COMPANY PROFILE PTARNOTTS INDONESIAArnott's is Australia's largest biscuit company and has an extensive manufacturing anddistribution operations in the Asia Pacific region. Arnott's has a long history of trading intoIndonesia, and in 1995, Arnott's entered into a JV with Helios Foods, an Indonesianbiscuit and snack manufacturer to manufacture Arnott's biscuits for the local market,under the subsidiary PT Helios Arnott's Indonesia.

In 1997, Arnott's acquired full control of the business, which now trades under the name

PT Arnott's Indonesia. The business, which is situated on a 17-acre site, employs around3,500 staff and produces more than 24,000 tonnes of product per annum.

Since its 1997 takeover by the Campbell Soup Company, Arnott's has continued to growits brand in the Indonesian market - backed by advanced processing technology andmarketing. Arnott's views Indonesia as a key manufacturing base for its regional market inSouth East Asia.

Arnotts has developed biscuit styles and tastes specifically for that market - even to the

extent of introducing a wafer-style version of the company's iconic Tim Tam biscuit. TheIndonesian operations are important to Arnott's. They play a key role in their offshoreoperations and are expected to grow substantially in the years to come.



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CCOONNFFEECCTTIIOONNEERRYY

Indonesian Confectionery Snapshot

MAJOR PRODUCTS Chocolate, gum confectionery, sugar confectionery.

TOTAL CONSUMPTION N/A

PER CAPITA

CONSUMPTIONN/A

MAJOR PLAYERS Cadbury Schweppes, Nestl , Mayora Indah, Ceres, Mars,Kraft.

TRENDS Up. Hypermarkets are an increasingly important outlet forbranded candy products.

ISSUES Market entry is tough, with many well-established local andglobal producers. Licensing of key brands is preferred modeof entry, with co-production and brand development.

The Indonesian confectionery industry is dominated by global brands, with a myriad oflocal producers catering for specialty lines or selling into particular regional markets.Indonesia is a major world producer of cocoa. Chocolate-based products are popular.

Nestl and Cadbury-Schweppes are major players in the Indonesian confectionerymarket. The Mars group has an operation in Indonesia, also offering its well-knownglobal brands.

The market for confectionery in Indonesia increased between 1998-2003, growingat an average annual rate of 2.1%.30

The leading company in the market in 2003 was Cadbury Schweppes. The second-largest player was Mayora Indah, with Ceres Natural Foods (Petra Foods) in thirdplace.31

Fruit gum candies are particularly popular in Indonesia and a profusion ofbrandscompete in thismarket frombothglobalcompaniesand localproducers


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heat sensitive goods, such as chocolate based items.

While the economic downturn has impacted confectionery sales, these products arereadily amenable to sale in small packs. A combination of attractive packaging, includingcartoon figures, has ensured that point of sale appeal and affordability of candy productsfor children has maintained market volumes.

Lindt chocolates are an example of a premium brand that grew strongly duringthe pre-crisis period and has maintained its position through the clever use ofpackaging and product sizing.

COMPANY PROFILE:PTNIRWANA LESTARI (PETRA FOODS)One of the worlds major manufacturers and suppliers of cocoa powder, cocoa butter andcocoa liquor. Petra Foods also manufacture and/or distribute branded consumer products,primarily chocolate confectionery for which they are the market leader in Indonesia. Petrahas manufacturing plants in 6 countries and sales outlets in 30 countries. The company hasestablished long-standing relationships with food manufacturers around the world who areincreasingly outsourcing their manufacturing requirements. The company is a market leader

in Indonesia and operates an extensive distribution network, which is attractive to owners of3rd party brands.

Petras branded chocolate confectionery and third party chocolate consumer productscommand a 57% share in the urban grocery market for chocolate confectionery inIndonesia. Petra began exporting from Indonesia in 1988 and now sells chocolateconfectionery products in 17 countries, including Thailand, Japan, the Philippines, HongKong, Australia and China. They also distribute third party brands in Indonesia, Singaporeand Malaysia, capitalising on their existing distribution channels.

The company is headquartered in Singapore and their principal operations are inSingapore, Indonesia, Malaysia, the Philippines, Thailand, Brazil and Mexico. TheirIndonesian manufacturing facilities are in Bandung. Petra Foods Ceres chocolate rice (orsprinkles) was introduced in the 1950s and is a strong brand name in Indonesia. PetraFoods have indicated an interest in working with Australian companies in the chocolateconfectionery market in Indonesia.

COMPANY PROFILE:PTUNICAN SURYAAGUNGUnican is an Indonesian confectionery company, established in 1981. The company produces awide range of hard and soft candies as well as chocolate confectionery. Unican has adaptedwell to market changes in Indonesia with a progressive approach to introducing new lines to


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TABLE 19:

IINNVVEESSTTMMEENNTTOOPPPPOORRTTUUNNIITTIIEESSCCOONNFFEECCTTIIOONNEERRYY


Chocolate-based

products

Many competitors, including

MNCs such as Nestl , Mars,

Cadbury-Schweppes and

others.

Niche opportunities exist, mainly

at the premium end of the

market. Co-investing in new

brands with an established

producer is likely to be the most

effective form of market entry.

Sugar-based hardconfectionery and gumcandies

A very crowded market, well-

segmented with both MNCs and

local companies.

Access to a strong distribution

chain is critical to success.

Licensing and brand

development with a local

company would be the preferred

and safest method of entering

the market.

Functional confectioneryproducts muesli bars,energy bars

A premium product category

where MNCs have strong

brands (e.g. Milo).

Potential again for licensing with

one of the Indonesian producers,

but market volume is limited and

growth would be off a small base.


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g

TABLE 20:

IINNVVEESSTTMMEENNTTOOPPPPOORRTTUUNNIITTIIEESSSSNNAACCKKFFOOOODDSS


Branded snacks such aschips, corn and potato-

based

Increasing trends towards

potato-based snacks.

Very high market entry barriers

including cost of brand

development and distribution.

Healthy snack foods and

bars

Upper market segment will

increasingly take up these lines,

but competition will be intense.

Selective market opportunities

could be accessed by working

with a supplier to the premium

end of the market.

Nut-based productsVery strong local competition

and a good raw material base.

Only potential would exist for

unique or highly tailored

formulations.

Novelty items The Indonesian market will

always be attracted to new lines

with popular and fashionable

themes.

Probably an area for larger firms

with strong promotion and

distribution networks, who are

always receptive to new product

types.

PTGARUDAFOODGarudafood is a market leader in the peanut snack industry, expanding their original peanut lineto include innovations such as crispy peanuts, coated peanuts, honey-coated and peanuts withflavored skins. Garudafood has expanded into other snack lines, such as biscuits (1997) and

jelly food (1998). The company employs over 15,000 staff.

An associated company runs peanut plantations in cooperation with peanut growers,particularly in West and Central Java, so that it can purchase from peanut growers atcompetitive prices. Independent surveys indicate that Garudafood has a dominant 65 percentmarket share in peanut snack products in Indonesia. To strengthen its base in the snack


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COMPANY PROFILE:PTSARI HUSADA (CLEARED)

PT Sari Husada Tbk was established in 1954 as NV Sari Dele - under the impetusof UNESCO to provide nutrition to pregnant and lactating women and theirbabies. The company has extensive manufacturing and distribution operationsthroughout Indonesia.

The companys core business is infant milk formula and they are a market leader inIndonesia with their SGM brand. Their product range includes infant milk formula aswell as growing up milks with various flavours. Ready to drink milks as well asbaby biscuits are to follow soon. The company is 80% owned by Nutricia

International BVof the Netherlands. It was sold to Nutricia following the 1987/89financial crisis by the Tigaraksa Group to help clear its foreign debt.

Soeloeng Hamonangan Nasoetion, President Director of Sari Husada emphasisedthe strength of the companys core business, which has been backed by animpressive financial performance. The company is listed on the Jakarta andSurabaya stock exchanges. Sales revenue in 2004 was over Rp 1 trillion(A$153,000 approx.).

Mr Nasoetion noted that Australian investors in the food sector will find a dynamicand demanding market place, but growth prospects for the future were sound. Hewelcomes approaches from Australian companies interested in investment ormanufacturing products for the infant market that are complementary to SariHusadas current range.

TABLE 21:

IINNVVEESSTTMMEENNTTOOPPPPOORRTTUUNNIITTIIEESSBBAABBYYFFOOOODD


Traditional baby foods Dominated by MNCs and huge

cost barriers to market entry to

replicate product penetration at

village level.

Prospects may lie in working with

major companies on co-

production of speciality

formulated lines.

Infant formula Dominated by MNCs. House brands may have limited

appeal in this sector.

Infant foods High emphasis on child nutrition Potential forworkingwith local


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FFOOOODDIINNGGRREEDDIIEENNTTSS

Increasing food quality requires an array of food ingredients some are complexformulations and others are well-known commodities such as salt. Emphasis is on foodquality and regulation by Indonesias BPOM has resulted in higher disclosure levels forprocessed food products and this includes most additives and related ingredients.

Food ingredients include the following products:

Flavours and essences Fragrances Seasonings Food colours Stabilisers Bread improvers Leavenings yeast-based products Baking powder/aerators Vitamins, amino acids, minerals Glazes Herbs and spices Cocoa butter and other cocoa-based ingredients Milk fat and related products such as butter fat and whey

Gelling agents Shortening Oils Salt Sugar and derivatives Preservatives.

This is only a small part of the range of products that are critical ingredients in the

production of processed foodstuffs. Others are whole foods in themselves, such as driedfruits, chocolate blends, pastry mixes, honey and nuts.

Ingredient suppliers are usually not as visible as their customers, and thesecompanies often provide an extensive range of products to cater for most food


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currently estimated by trade sources at 10% plus with attendant high levels ofprofitability.35The middle to lower market offers large volume potential for ingredientproducers but is highly price sensitive. Clever product formulation and presentation iscritical in this sector to achieve the correct blend of product functionality and price.

The growing bakery sector is a strong market for food ingredients, ranging from basicproducts such as bread improvers to fancy fillings and toppings for cakes and pastries.

CASE STUDY:CHEETHAM SALT Cheetham Salt, a member company of Australias Ridley agribusiness group,established a 100% Australian-owned Indonesian company, PT Cheetham Garam,in 1998.

Cheetham produces salt for food and industrial applications at a plant in Cilegon,West Java. Cilegon was chosen as a production site in view of its proximity tomajor customers, as well as nearby efficient port facilities for salt discharge. BillPoynton, Cheetham CEO, stressed the importance of the Indonesian food industryto their business. Major food producers, such as Indofood and Unilever demandthe best food ingredients and we provide international quality salt for key processed

food items, such as instant noodles, soups and sauces.

Cheetham processes both Indonesian and imported salt from Australia. BillPoynton noted We have excellent relationships with our Indonesian buyers and ourexperience as an investor has been good. Salt is, however, subject to governmentregulation and import licensing, which adds a more complex dimension to ourbusiness. As the Indonesian economy is opened further to global competition, theneed for government controls over the salt industry will hopefully not be necessary.


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CASE STUDY:PTPRAMBANAN KENCANA

Prambanan Kencana is one of Indonesias major suppliers of high quality foodingredients. The company was established in the 1950s as a supplier ofagrochemicals and in 1972 started importing foodstuffs and ingredients from theNetherlands, followed closely by local ingredients manufacture in association with aDutch company.

Prambanan Kencana supplies primarily to the baking and confectionery industries,offering over 1,000 product lines. 60% of their ingredients are locally-produced andthe others are imported - some from Australia.

President Director Danny Solichin emphasised the continuing strong demand forquality ingredients. Providing top class technical backup is critical to our businessDanny Solichin stressed. Prambana Kencana operates a training school for theirclients pastry chefs with 9 trainer technicians. Danny Solichin also noted Two newindependent bakeries are opening every month in Jakarta so its a reallycompetitive and innovative market where consumer taste is changing rapidly. Therapid success of the Bread Talk franchise from Singapore is evidence of the highvelocity of this market sector.

Prambanan Kencana is interested in discussing food ingredient businessopportunities with Australian companies.


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SSEEAAWWEEEEDD--BBAASSEEDDFFOOOODDIINNGGRREEDDIIEENNTTSS

Indonesia is the worlds second largest producer (after the Philippines) of tropicalseaweeds for the extraction of food additives and stabilisers. Indonesia exports much ofits seaweed in unprocessed, dried form but there are also several producers ofcarrageenan and agar-agar, as well as semi-processed product.

As only 20% of the dried seaweed is used for extraction, there is a strong case forlocal production, at least to the semi-refined stage, rather than shipping

unprocessed dried weed. Sulawesi is the main centre of production with SouthSulawesi contributing 25% of Indonesias output. Unlike in the Philippines,Indonesian waters are generally protected from hurricanes, and this assistsseaweed production.

Indonesias islands provide excellent sources of commercial seaweed species, such asEucheuma Cottoniiand Eucheuma Spinosum, sources of carrageenan. Carrageenan isone of the principal extracts of seaweed, used as a thickener and viscosity control agentin a range of foods from pet food to ice cream to provide texture, structure and stability.It is an essential component of many convenience foods. Carrageenan also has anadvantage over animal-based gelatine as a halalingredient.

While these products have similar gelling and viscosity modification properties,their applications do overlap and there are therefore distinct markets for all threeproducts, which are commonly identified in food ingredient terminology as E406

(agar-agar) and E407 (carrageenans).

The global market for carrageenan and agar-agar is estimated to be growing at 5-10%per annum with sound market potential as these products are not only extremelyeffective, but consumer preference favors natural rather than synthetic ingredients.

Other commercial species of seaweed in Indonesia, such as GelidiumGracilaria, arerich sources of agar-agar, another gelling agent that is a major ingredient in Asian foods(particularly in Japan) as it forms a highly stable gel at room temperature. Agar-agar isalso used as a culture medium for microbiological applications.

The International Finance Corporation(IFC), the private sector development arm of theWorld Bank Group has introduced an innovative plan to help Indonesias seaweed


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The seaweed processing industry has many advantages for investment, and these areset out in a comprehensive IFC paper36, which includes a detailed business plan for theindustry.

Some of the positive characteristics of the industry are:

Ready availability of quality raw material Cheap labour source, with few alternative occupations for coast dwelling

villagers A short production cycle- about 45 days

Low fixed and variable costs A cash crop with good returns to farmers, ensuring steady supply Internationally traded product.

Producing ingredients to food grade quality, which requires aseptic drying (rather thansun-drying) adds high value to the product.

CASE STUDY:PTINDOKINGANEKAAGAR-AGAR INDUSTRIIndoking is based in Medan and is a private company, operated by the Halim family. Thecompany buys dried seaweed from Sumatra, Kalimantan and Sulawesi and extracts agar-agarat its Medan processing plant. The bulk of the companys production is exported to Japan andother Asian destinations for use as a gelling agent for foods. Agar-agar is a naturally basedproduct that forms high strength gels at room temperature. It is a superior ingredient to cheapercellulose-based thickeners and stabilisers. President Director Pak Tomas Halim is proud of hiscompanys achievements and the international acceptance of his product by the food industry.He is planning to introduce a new range of agar-agar products for microbiological applications.Mr Halim is interested in discussing business opportunities in seaweed products andderivatives with Australian companies.

TABLE 22:

IINNVVEESSTTMMEENNTTOOPPPPOORRTTUUNNIITTIIEESSFFOOOODDIINNGGRREEDDIIEENNTTSS

OPPORTUNITY MARKET SETTINGS &TRENDS COMMENTARYIngredient formulation Excellent growth prospects,

particularly in ingredients forconvenience food and massmarkets.

Indonesian companies are well-positioned to enter intocollaborative businessassociations in blending andformulation of ingredients.


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HHAALLAALLFFOOOODDSS3377

In terms of emerging investment opportunities, proposals have been made byIndonesian interests to develop capacity in halal food production, to enable Indonesia tobecome a major exporter of halal food products, particularly to the Middle East, whereIndonesias Muslim status and production capability are recognised and well-received.

The term halal is a very broad one, and refers to all that is lawfulor permittedunder

Islamic law. Its opposite is haram and refers to all that is forbidden by Islam. InIndonesia, however, the term halalis generally used in terms of food, and in addition tomeat, covers all other foodstuffs, as well as food ingredients and food contact materials.

The Australian meat industry is particularly familiar with halal certification, as theIndonesian Government requires that all beef exports to Indonesia have a halalcertificate, along with a health certificate and come from halal slaughter establishmentslisted with the Indonesian Ministry of Agriculture.

There may be opportunities in this area. Indonesias neighbours, Brunei and Malaysiaare exploring similar business models, to develop capacity as significant exporters ofhalal products. They are using third countries such as Australia, as a source of rawmaterial supply, which is then processed appropriately in their facilities.

Australia is fortunate to have a strong and commercially active Islamiccommunity, and certification capability is readily available. Australian companiesconsidering investment need to evaluate the return from offshore investment inhalal capability, to determine the degree to which such offshore processingmakes their products more competitive in Islamic markets.

FFAASSTTFFOOOODDFFRRAANNCCHHIISSEESS

A number of the worlds major fast food providers commenced operations in Indonesiain the 1980s and enjoyed buoyant trading conditions until the 1997/98 financial crisis.Krismon resulted in a significant rationalisation of the industry but major global chainssuch as McDonalds adroitly adapted their offerings with smaller size serves as well asbasic crisis products (e.g. egg and rice) to cater for the difficult times.


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GGRROOWWTTHHPPRROOSSPPEECCTTSSIINNKKEEYYIINNDDOONNEESSIIAANNAAGGRRIIFFOOOODDIINNDDUUSSTTRRIIEESS

Discussions held in Indonesia across a wide range of food sectors produced thefollowing estimates of market growth rates based purely on anecdotal results.40

TABLE 23:ESTIMATED MARKET GROWTH RATES IN INDONESIA

LOW

(0-5%P.A.)

MEDIUM

(5-10%P.A.)

HIGH

(10% +P.A.)

Poultry Dairy including eggs Instant noodles Fruit & vegetables Baby food Meat beef, lamb & goat meat

Candies & chocolate RTD beverages/water Food ingredients Vegetable oils Coffee & tea Bread products Biscuits

Snack foods Convenience foods -(ready to serve)Low base

Health and functional foods (lowbase)


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FIGURE 21:

Baby

foodsPoultry

BeefBakery

Fruit &

vegetables Beverages

Dairy Confectionery

Snack

foods

Food

ingredients

Attractiveness RankingAttractiveness Ranking

Muchpotentialbut rawmaterialsupply andhandling amajor issue.

High growthandpotential iningredients.

FewAustralianplayers.Excellentlong termpotential inview ofdietaryproteinneeds.

A range ofopportunitieswhere

Australianinnovationcouldprovide acompetitiveedge.

A highlyfragmentedindustry

where nicheopportunitiesexist.

Prospectsfor workingwithIndonesianproducerson newbrands.

Newopportunitiesemerging

where Australiahas a strongadvantage.

Strong MNCcompetitionbutprospectsfor infantfood.

Potentialforderivative

productsbut barriersto entrynow high.

Australiaalreadystrong insupply and

should bepositionedfor greaterengagement.


Page 94


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TABLE 24:IINNDDOONNEESSIIAANNFFOOOODDIINNDDUUSSTTRRYYCCHHAARRAACCTTEERRIISSTTIICCSS((SSCCAALLEE11==LLOOWW1100==HHIIGGHH))INDUSTRY SECTOR SCALE OF OPERATION FOREIGN INVESTMENT COMPETITIVE PRESSURES AUSTRALIAN ADVANTAGE

Fruit + Vegetables 7 3 4 4

Dairy 3 7 6 6

Beverages 7 6 8 6

Poultry 7 7 7 2

Beef 3 6 5 8

Bakery 8 4 8 6

Confectionery 7 5 8 4

Snack foods 7 6 7 3

Baby foods 8 8 8 3

Food ingredients 4 5 6 7

TABLE 25:IINNVVEESSTTMMEENNTTAATTTTRRAACCTTIIVVEENNEESSSSMMAATTRRIIXX((SSCCAALLEE11==NNOOTTAATTTTRRAACCTTIIVVEE1100==AATTTTRRAACCTTIIVVEE))INDUSTRY SECTOR EASE OF ENTRY

Weighting = 0.4

CAPITAL REQUIREMENT

Weighting = 0.3

SALES POTENTIAL

Weighting = 0.3

OVERALL

ATTRACTIVENESSRANKING

Fruit + vegetables 3 5 5 4.2

Dairy 4 6 7 5.7

Beverages 4 6 7 5.7

Poultry 2 7 7 5.0

Beef 3 5 5 4.2

Bakery 6 4 6 5.4

Confectionery 7 4 6 5.8

Snack foods 7 4 7 6.1

Baby foods 2 2 7 3.5

Food ingredients 7 6 7 6.7

investment report part 2

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